THE AUTHORS:
Mayank Makhija, Advocate at the Supreme Court of India
Naman Sharma, LL.B. Student at Maharashtra National Law University, Nagpur
Environmental, Social and Governance (“ESG”) obligations are increasingly moving from voluntary corporate commitments into commercial contracts, financing agreements, shareholder agreements and investment treaties, alongside a rise in ESG-related regulations targeting issuers and investors since 2015, particularly in areas such as corporate disclosures, waste reduction, climate risk and sustainable investment practices. The Supreme Court of India, in Vellore District Environment Monitoring Committee v. The District Collector, Vellore District & Others, has itself recognised ESG as an emerging concept in the corporate world and a positive step towards preserving ecology.
International developments also reinforce the shift. In Milieudefensie et al. v. Royal Dutch Shell PLC, the Hague District Court in 2021 ordered Shell to reduce its Scope 1, 2, and 3 emissions by 45% by 2030, relative to 2019 levels. In November 2024, however, the Hague Court of Appeal quashed the District Court’s judgment and dismissed the claims in full, while holding that Shell has a duty of care to curb dangerous climate change. The case is currently pending before the Supreme Court of the Netherlands.
Similarly, the European Union’s “Fit for 55” package and global initiatives such as the Paris Agreement, the Equator Principles and the Principles for Responsible Investment have encouraged businesses and financial institutions to integrate ESG standards into commercial decision-making. Under the six Principles, signatories undertake, inter alia, to incorporate ESG issues into investment analysis and decision-making processes, to act as active owners, and to seek appropriate disclosure on ESG issues by the entities in which they invest (See, PRI, ‘PRI signatories must report climate change risks from 2020’, 20 February 2019).
As businesses increasingly adopt ESG commitments, disputes concerning climate targets, responsible supply chains, sustainability disclosures, and corporate governance are becoming inevitable. The real question is no longer whether these disputes will arise, but whether arbitration is equipped to resolve them.
Although ESG arbitration is often treated as commercial arbitration, ESG disputes increasingly blur the distinction between private and public rights, making Indian arbitration law a useful case study to assess whether its existing arbitrability test remains adequate.
The Existing Arbitration Law Provides Only a Partial Answer
The Arbitration & Conciliation Act 1996 does not expressly define which disputes are non-arbitrable (See, A. Ayyasamy v. A. Paramasivam). Instead, Sections 34(2)(b)(i) and 48(2)(a), however, make it clear that an arbitral award may be set aside if the court finds that “the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.”
The Supreme Court of India in Vidya Drolia v. Durga Trading Corporation observed that arbitration is fundamentally a mechanism for resolving disputes concerning private rights. The Court laid down a fourfold test for arbitrability and held that disputes affecting third-party rights or having erga omnes effect, disputes involving sovereign or public interest functions of the State, and disputes expressly or impliedly rendered non-arbitrable by statute ordinarily fall outside the scope of arbitration (para. 45).
In Booz Allen and Hamilton v. SBI Home Finance Ltd, it was held that only disputes arising out of a right in personam are arbitrable, whereas disputes arising out of a right in rem, exercisable against the world at large, are excluded from the scope of arbitration.
Where ESG Disputes Put Pressure on the Test
While these principles remain doctrinally sound, ESG disputes expose their practical limits. Unlike conventional commercial disputes, ESG obligations often blur the distinction between private and public rights. Environmental disputes may affect third-party rights, public interests, and statutory obligations, while labour and consumer-related ESG commitments may overlap with employment and consumer protection laws. As ESG obligations increasingly intersect with public law, the existing law provides limited guidance for such disputes.
The difficulty is greater because ESG clauses often use broad terms such as “reasonable sustainability standards”, “best efforts”,and “international ESG principles”. Unlike ordinary contractual terms, these standards are based on evolving regulations, international guidelines, and soft-law instruments rather than clear statutory definitions. Arbitral tribunals must therefore determine the legal significance of these evolving standards while interpreting the contract.
The challenge goes beyond contractual interpretation. ESG disputes also raise procedural questions that existing arbitrability principles do not clearly answer, particularly where disputes affect public interests or local communities. Indian arbitration law provides little guidance on these issues.
Not Every ESG Dispute Should Be Treated Alike
Treating all ESG disputes alike overlooks their different legal character. ESG spans environmental, labour, governance and responsible-business issues, with disputes over green financing, sustainability-linked loans and shareholder agreements generally concerning private rights and therefore suited to arbitration.
The position becomes more difficult where contractual obligations overlap with statutory duties. In Dushyant Janbandhu v. M/s Hyundai AutoEver India Pvt. Ltd., the Supreme Court of India held that disputes falling exclusively within the jurisdiction of statutory authorities are not arbitrable. Although the case concerned wages and termination under the Payment of Wages Act and the Industrial Disputes Act, its reasoning is relevant to the “social” limb of ESG, particularly where contractual employment arrangements intersect with statutory labour protections. Similarly, in Emaar MGF Land Ltd. v. Aftab Singh, the Supreme Court held that arbitration cannot ordinarily override statutory consumer remedies.
Environmental disputes present a greater challenge because pollution, biodiversity loss and climate harm can affect the wider public and involve statutory duties. At the referral stage, courts can apply the Vidya Drolia test by examining the source of the obligation, the relief sought, the impact on third parties, and whether a statute assigns the matter to a specialised authority. Contractual ESG disputes with party-confined relief can proceed to arbitration, while disputes involving statutory enforcement, public rights or third-party interests should remain before the appropriate court or regulator.
This view would likely be based on Section 34(1), which provides that, subject to the parties’ agreement, “it shall be for the tribunal to decide all procedural and evidential matters”. Section 34(2) gives examples of such matters, but the word “include” suggests that the list is not exhaustive.
Towards a Dual-Track Approach to ESG Arbitration
A better approach is to divide ESG disputes into two categories. The first track covers contractual ESG disputes, such as sustainability-linked pricing, emissions targets, supply-chain standards and ESG representations, which primarily concern private rights and should generally remain arbitrable. The second covers disputes where contractual obligations overlap with statutory duties or public rights, such as environmental harm, labour exploitation, misleading sustainability disclosures or other regulatory violations, where the wider impact may require judicial or regulatory supervision. In India, this concern is particularly relevant to SEBI’s Business Responsibility and Sustainability Reporting (“BRSR”) framework, which requires specified listed entities to make structured disclosures on their environmental, social, and governance performance. Disputes concerning compliance with such mandatory disclosure requirements may therefore extend beyond purely contractual rights and require regulatory oversight.
This approach does not depart from or create a new doctrine beyond the principles laid down in Vidya Drolia and Booz Allen. Rather, it proposes a test for applying these existing principles to ESG disputes. Courts and tribunals should specifically ask whether the relief sought would bind only the contracting parties or have effects on non-parties, and whether the ESG standard invoked is expressly defined in the contract or derived from an external statutory or regulatory instrument.
These questions help determine whether a dispute remains private or crosses into public-law territory. An ESG dimension alone should not determine arbitrability. This approach provides certainty while preserving arbitration for contractual ESG disputes and judicial or regulatory oversight for matters involving wider public rights.
International Practice Suggests Reform Rather than Expansion
International practice also demonstrates that ESG-related arbitration can work when the underlying obligations and enforcement mechanism are carefully designed. The Bangladesh Accord on Fire and Building Safety arose from a legally binding agreement between global brands and trade unions following the Rana Plaza collapse. Under the Accord, disputes could proceed to arbitration under the UNCITRAL Rules, with the Permanent Court of Arbitration (“PCA”) serving as the administering institution. In 2016, IndustriALL Global Union and UNI Global Union commenced two arbitrations, PCA Case Nos. 2016-36 and 2016-37, against global fashion brands. Both proceedings were terminated in July 2018 following settlement agreements. The Accord shows how carefully drafted contractual obligations, institutional oversight and clear dispute resolution can make ESG arbitration workable, without implying that all business and human rights disputes are arbitrable.
Similarly, international investment law is increasingly recognising ESG obligations. The Dutch Model Bilateral Investment Treaty provides that investors may be held responsible for non-compliance with, inter alia, the OECD Guidelines for Multinational Enterprises and United Nations Guiding Principles on Business and Human Rights. This reflects the growing integration of sustainability into investment arbitration.
Transparency has also become an important concern. ESG disputes can expose both the potential and limitations of arbitration, particularly where environmental protection or human rights are involved. While confidentiality is a key feature of arbitration, it is more difficult to justify where disputes involve wider public interests. The UNCITRAL Rules on Transparency and the Hague Rules on Business and Human Rights Arbitration seek to balance confidentiality with greater transparency where public interests are involved.
India may not need a separate ESG-specific framework on arbitrability. Courts can clarify its limits by looking at the obligation, its source, the relief sought, and those affected. Arbitral institutions can support this through expert evidence, ESG data disclosure, and flexible case management. Clear contracts should also set out ESG standards, targets, verification, and consequences for non-compliance. These steps can reduce uncertainty and strengthen ESG arbitration in India.
Conclusion
ESG disputes should not be automatically excluded from arbitration. Contractual ESG obligations should generally remain arbitrable, while disputes involving statutory duties, third-party rights or broader public interests may require judicial or regulatory oversight. ESG arbitration in India is still evolving and has limited jurisprudence directly addressing its distinct challenges, but the existing arbitrability framework provides a clear path by focusing on the source of the obligation and the relief sought. The future of ESG arbitration, therefore, depends on identifying where arbitration should end and public law should begin.
